FTSE 100 slumps after Darling reveals £50bn bank 'nationalisation'

Shares slumped today after the Government announced a £500bn state rescue of Britain's crumbling High Street banks in the biggest nationalisation of modern times.

State control: Banks will have to issure shares to the Government

The FTSE 100 index was down more than 230 points by mid-morning after Alistair Darling confirmed the drastic rescue plan that heralds a new era for the banking system.

He and Gordon Brown were forced to act amid fears that without the injection of taxpayers' money, household names in banking could vanish in days, if not hours.

The Treasury confirmed eight of the UK's largest banks and building societies had signed up to an initial £25bn fund, with £25bn available to other firms.

A further £200bn will be offered to banks in short-term loans in a bid to try and improve liquidity, extending the Bank of England's existing £50bn Special Liquidity Scheme which allows banks to swap risky mortgages for Treasury bonds.

Another £250bn will be pumped into the financial system under a debt guarantee scheme.

Alongside the bail-out plan, the Chancellor also announced that the Government would guarantee all of UK savers' deposits with collapsed Icelandic internet bank Icesave - after concern yesterday that savers might have to apply to the Icelandic authorities for some compensation, and that savings above £50,000 could be lost.

Mr Darling said this morning that the measures were 'absolutely critical' to helping Britain through these 'extraordinary times'.

'It is a process that inevitably will take time. It is not an instant change but it is a restructuring, it is stabilising the system, and that is very important,' he said.

The bailout will cost each taxpayer up to £2,000 but the Chancellor insisted their interest was being protected.

'I'm very clear that in return for all this, the taxpayer has got to see some upside. In relation to lending to small businesses, in relation to mortgages... that's important too,' he said.

Gordon Brown added: 'Extraordinary times call for bold and far reaching solutions. This is not a time for conventional thinking or outdated dogma but for fresh and innovative intervention that gets to the heart of the problem.

'These decisions on stability and restructuring are the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and businesses.'

Shadow chancellor George Osborne said: 'This is the final chapter of the age of irresponsibility and it's absolutely extraordinary that a government has been driven by events to today's announcement.'

The rescue plan was confirmed shortly before the markets opened. Investors were expecting yet another bloodbath over the day after Asian stocks tumbled overnight

Japan's Nikkei fell nearly 10% at one stage, Hong Kong's Hang Seng was down 5.5%. In Australia, the key index lost 5%. The slump followed a huge sell-off on Wall Street which saw the Dow Jones index close down more than 500 points.

Analysts were not optimistic the Government bail-out would ease the turmoil. CMC Markets dealer Matt Buckland: 'For the time being, it looks as if the impact is going to be minimal.

'As we've seen in the US, government intervention isn't freeing up credit markets and that is the key point - if it's difficult for companies and individuals to get hold of credit, it's going to be difficult to stimulate growth and break out of this recessionary mindset.'

Though Gordon Brown and Alistair Darling are desperate not to present the move as a crisis measure, it was clear that another day of panic and chaos on the stock market had left them with no other option.

The alternative was to allow the Royal Bank of Scotland - one of the world's ten largest banks with a £1,900bn balance sheet - to collapse, dragging down large sections of the economy with it.

Yesterday the owner of NatWest saw 40% of its market value wiped out, with shares trading at one stage for as little as a penny. Last year they topped £6.

The bailout came on another extraordinary day of economic upheaval when:

• Internet bank Icesave went into receivership, leaving 200,000 British savers unable to access their money;

• Thousands of small and medium-sized businesses were said to be on the brink of collapse;

• Pressure grew on the Bank of England for an interest rate cut of up to 1% tomorrow;

• The International Monetary Fund warned that Britain will be a major casualty of a world economic downturn.

Final details of the part-nationalisation were being hammered out overnight in Downing Street crisis talks between Mr Brown and Mr Darling, Bank of England governor Mervyn King and Financial Services Authority chairman Lord Turner.

The Chancellor emerged to confirm that he intended to unveil a package aimed at putting the banks on a 'longer term sound footing'.

'I intend to make a statement before the markets open tomorrow morning and I will be making a further statement to the House of Commons later in the day,' he said.

The Treasury has torn up its previous policy of responding to the economic turmoil on a case-by-case basis - intervening to nationalise Northern Rock and the Bradford & Bingley - in favour of an overall rescue plan.

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However, there are doubts about whether it will be effective at such a late stage. The $700bn bail-out of toxic bank debts in the US has so far failed to restore confidence.

Last night Wall Street closed down another 508 points, or 5.11%, marking the the Dow Jones index's biggest five-day point loss ever.

Critics will fear the bailout will give the state unprecedented control over the banking sector, but Whitehall and industry sources were at pains to insist that civil servants would not have a say over the day-to-day business of the banks, as happened when Northern Rock was nationalised.

Yesterday City figures lined up to accuse Chancellor Darling of dithering over how to respond to the crisis and failing to provide appropriate reassurance at an earlier stage.

The sector has been paralysed as banks refuse to do business with each other, worried that competitors could fold. A holding statement from Mr Darling on Monday simply pledging to do 'whatever it takes' deepened confusion about the Government's strategy.

Investors were spooked by reports that the banks had gone cap in hand to the Treasury asking for a bail-out. In the turmoil, one trade in RBS went through for a penny a share, before rebounding to 90p.

The banks denied they had asked the Government for money, but there is little doubt that they are in desperate need of cash. HBOS shed 42% yesterday, while merger partner Lloyds TSB fell 13% and Barclays slid 9.2%.

Treasury officials accused bank bosses of triggering the collapse by leaking details of private discussions about a 'recapitalisation' package.